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Dell Cost Cutting $1 Billion As Profits Fall 48%

Like other PC companies, Dell is suffering from the effects of the worldwide recession.

Antone Gonsalves

February 26, 2009

2 Min Read

Dell on Thursday reported that profits fell by nearly half in the fiscal fourth quarter, and the computer maker said it would slash $1 billion more in expenses to bring costs in line with falling sales in the economic downturn.

Dell last March promised Wall Street that it would cut costs by $3 billion annually by the end of fiscal 2011. However, in reporting that sales fell globally in the quarter ended Jan. 30, Dell executives said they have found more areas to cut.

"The cost actions we took this past year made us more competitive and delivered value to customers in a challenging economic environment," Dell CFO Brian Gladden said in a statement. "In fact, we now have a clear view to additional opportunities, and are raising our cost-reduction target to $4 billion."

Revenue in the quarter fell 16% from the same period a year ago to $13.4 billion. Profits plummeted 48% to $351 million, or 18 cents a share, from $679 million, or 31 cents a share.

Like other PC companies, Dell is suffering from the effects of the worldwide recession, said John Spooner, analyst for Technology Business Research. But the company also has some unique challenges, such as its heavy dependence on sales to businesses.

"Its relative success in the consumer business in [fourth-quarter 2008] was not able to overcome a significant slowdown in sales to enterprise customers," Spooner said in an e-mail. "I don't see this changing very much over the course of 2009, given that enterprises continue to spend very carefully on technology at this point in time."

As to the type of cost cutting expected from Dell, Spooner said he sees more layoffs ahead as the company continues to consolidate and outsource manufacturing. In addition, Dell is likely to reduce its sales head count as it increases sales through other retailers.

Dell saw sales fall across all regions worldwide. In the Americas, Dell's biggest market, revenue fell 17% and unit shipments dropped 23%. Sales were down significantly among all customers, particularly small and medium-sized businesses and the largest corporate customers.

While shipments in the consumer market increased 18% globally, revenue declined 7% as buyers chose low-priced notebooks and desktop, said Dell, the second-largest computer maker in the world.

Dell rival Hewlett-Packard has also suffered in the global recession. The world's largest computer maker reported last week that profits in the fiscal first quarter ended Jan. 31 fell to $1.85 billion from $2.13 billion in the year-ago period. Revenue rose 1%, but failed to meet Wall Street estimates.

Dell is undergoing a reorganization launched by founder Michael Dell when he returned as chief executive in 2007. So far, founder Dell's changes have failed to drive consistent growth.

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